A recent Nobel economics winner, Alvin Roth (2012), differentiates himself from his colleagues by stressing his work on real-world, applied problems. This may come as a surprise to those who are unfamiliar with the ways of economists. The regression-based methods and data-grounded techniques of economists are necessarily limited in their complexity, which limits their ability to address real-world problems that abound with complexity. Such techniques exist, and they are based on advanced computation. Moreover, there have been researchers who have exhibited the applicability of alternative and arguably more capable methods, but these have not gained traction within economics. Specifically, Herbert Simon was trained in social science but made significant contributions in artificial intelligence, experimental psychology, and economics for which he won the Nobel in 1978.
Simon’s thoughts on advanced analysis techniques were initially discussed in his Sciences of the Artificial, but his Reason in Human Affairs is focused upon here. All of Simon’s work focuses on bounded rationality, the concept that human decision-making is based on few and certain data rather and under stress decision making is based on even fewer and more certain data. Simon’s work stands in contradistinction to establishment economics in which rationality is not bounded and is assumed to address, incorporate, and base decisions on all available information, which does not agree with experimental results. The boundedness of human cognition makes an implicit assessment of social institutions, at the national and international level, that they are dynamically complex and so their behavior: (1) is hard to predict, (2) exhibits policy resistance, and (3) is often surprising.
Once consequence of bounded rationality is that the intuition of senior policy makers is flawed and can benefit from systems that account for and address the complexity attendant in social systems. There are multiple computational techniques that can be used to do this, and they each have strengths and weaknesses. The key need is that computers need to integrate, interpret, and coordinate information that result in actionable knowledge. The key is synthesizing information at the macro, decision-making level.
Once consequence of this insight is that there is an implicit criticism of senior government decision makers that says, “Your insight is often wrong and can be improved.” This observations does not endear those who voice them with said decision makers, and this might explain why such techniques have not been taken up an applied. In fairness however, such techniques may not be as universally applicable as those who develop them might think. A graduate student was driving Prof. Simon to the airport after he won his Nobel, and he couldn’t think of anything to talk about, so he asked Simon about it. To his surprise, Simon expressed anger because he the award felt more like a “lifetime achievement award” than a recognition that his techniques had been taken up and applied by practitioners. The opportunity remains to apply Simon’s techniques to the study of complex social system by economists and other disciplines as well, especially as challenges to the international system seemed destined to arrive with greater velocity and ferocity.